Strong buying drives AIB shares to new highs

ALLIED Irish Banks' £840 million acquisition of Dauphin Deposit Corporation - the biggest ever by an Irish company - has been given a rousing vote of confidence, with huge demand in both Dublin and London driving AIB shares to new highs.

Alter falling on Tuesday ahead of the Dauphin announcement, AIB shares jumped 20p to 426p yesterday, boosting AIB's stock market value by over £137 million to over £2.9 billion. Over 2.5 million shares dealt in London alone and dealers said turnover in Dublin was at least as high.

The fact that the acquisition will not involve any fund raising on the Irish market was warmly welcomed, as was the proposal to buy back 50 million shares - a move that will ease the potential overhang of up to 140 million shares that may be issued to Dauphin shareholders. "There may still be some flowback from Dauphin shareholders to the Irish market, but the buyback will ease most of these problems."

The exact mix of cash and shares that AIB will pay for Dauphin will only become clearer when Dauphin shareholders make up their minds on the two available options. But AIB's chief executive, Mr Tom Mulcahy, has said that the bank's "desirable mix" would be 70 per cent shares and 30 per cent cash.

This would involve about 140 million new shares being issued to Dauphin shareholders, although AIB then intends to reduce the number of shares in issue by buying in 50 million shares at the prevailing market price. At current prices, this would cost AIB in the order of £215 million.

Dealers in both Dublin and London said there was heavy demand for AIB shares - demand that rubbed off on Bank of Ireland which closed up 16p on the day also on a new high of 582p. "People are delighted that the air has been cleared, an acquisition like this has been hanging over AIB for the past nine months," said one dealer.

He added that the market also welcomed the fact that the acquisition will use up virtually all of AIB's surplus capital and will be earnings enhancing from year two. The only word of caution came from one broker who said.

AIB might find it difficult to continue Dauphin's rate of growth, given that the Pennsylvania based bank has been so tightly managed in the past.

Most analysts have yet to produce actual revised forecasts for the newly expanded AIB, with the impact on earnings per share depending on the exact amount of cash and new shares that are being used to fund the deal. But the general view on Dublin dealing desks is that the share is likely to move ahead further and it may not be long before AIB breaks through the £3 billion market capitalisation barrier - even before new shares are issued to Dauphin shareholders.

At yesterday's closing level of 427p. AIB is on a prospective dividend yield of 4.3 per cent, a substantial discount to Bank of Ireland's yield of 3.8 per cent. Bank of Ireland has outperformed AIB in recent months but some dealers believe the next few weeks will see AIB shares perform more strongly than Bank of Ireland.

AIB will also benefit from the fact that the extra shares it will issue to Dauphin shareholders will increase its weighting in the ISEQ Index from 12.5 percent to 15 per cent, a weighting that has obvious implications for index buyers.

Fund managers who spoke to The Irish Times said that investors now have two clear alternatives when deciding on putting money into AIB and Bank of Ireland. "AIB gives a straight play on the Irish economy and American regional banks, Bank of Ireland gives a play on the Irish economy and the British housing market through Bristol & West and BIM you take your pick," said one domestic fund managers who described both bank stocks as "buys".

Banking analysts in the US also gave a thumbs up to the Dauphin acquisition - both for the structure of the deal and the increased market presence it gives AIB in southern Pennsylvania.

"Dauphin has been considered a premier acquisition target in Pennsylvania. They have a terrific market presence," said an analyst, Mr Jim Schutz, of ABN AMRO in Chicago. Dauphin and AIB's First Maryland subsidiary will have a 37 per cent market share in southern Pennsylvania.

"An institution of Dauphin's size, it's big enough for Allied Irish to have an impact in the US market," said Mr Kevin Timmons of First Albany Corporation. He added: "Dauphin's consumer and commercial business is pretty robust, they know their markets well."